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Pioneer Natural Resources’ challenge: Show investors the Permian money, not just production

After a CEO change, a cost-cutting buyout for employees and a high-priced bid for a rival, Pioneer Natural Resources looks like a takeover target.

Oil pumpjacks line the horizon in the Permian Basin, where Pioneer Natural Resources is a major producer. There's pressure on the Irving-based company to cut spending and increase returns to shareholders. (Ryan Michalesko / Staff Photographer)

By many measures, 2018 was a strong year for Pioneer Natural Resources.

Total revenue for the independent energy company topped $9.4 billion, an increase of almost 73 percent. Average daily production of oil, natural gas and natural gas liquids grew more than 17%. The Irving-based company even quadrupled its dividend.

Yet when the CEO discussed results in a mid-February call, he faced a tough crowd.

“Your share price today is pretty much where it was in March 2016,” the first analyst said.

But production was much higher and oil prices were up. Maybe Pioneer should consider slowing its growth and buying back more shares, said Doug Leggate of Bank of America Merrill Lynch.

“My point is the market clearly isn’t paying for your business model,” he said.

Apparently, that wasn't enough. One week later, Dove retired abruptly after two decades at Pioneer, and chairman Scott Sheffield returned to his former role as CEO. In a statement, Sheffield said he and the board were focused on enhancing performance and capital efficiency and delivering strong results for shareholders.

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That sounds like corporate boilerplate, but it reflects a meaningful shift — at Pioneer and in much of the oil patch, especially the booming Permian Basin where Pioneer drills.

There's a new emphasis on generating more free cash and higher returns for shareholders. That means restraining spending and looking for ways to get more scale and efficiency. This month, Pioneer said it was offering buyouts to employees, part of a larger plan to cut $100 million in costs.

Many believe Pioneer also could become a takeover target. On April 12, Chevron agreed to buy Anadarko Petroleum for $33 billion, a 37 percent premium over the previous day’s closing price.

Last year, Pioneer’s average production was the equivalent of nearly 320,000 barrels a day. That’s almost twice as much as five years earlier and the strong growth was supposed to continue.

In early 2017, soon after Dove was promoted from president to CEO, he laid out a new vision for Pioneer: to generate 1 million barrels a day by 2026. A few months later, he celebrated the groundbreaking on a new 10-story headquarters in Las Colinas, which will be completed this year.

All that may have been the right story for then, but 2019 has a different narrative: Show investors the money.

"The paradigm has flipped," said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University. "Investors are more concerned with generating free cash flow and returning it to shareholders."

In the fracking sector, Bullock said, most companies have been spending more to produce energy and lock up reserves than they’re bringing in. They pulled that off by borrowing, selling shares and selling assets.

With cheap money, producers were chasing growth for growth’s sake.

“The investment community has said, ‘Enough already,’” Bullock said.

Energy investors have reason to be restless. Over the past five years, an index of energy stocks has declined 14% while the S&P 500 climbed over 80%. Over the past two years, energy companies also lagged the broader market despite a strong performance so far this year.

On Thursday, Pioneer’s market value was $29.5 billion, up sharply since the end of 2018. But it was worth over $36 billion less than a year ago.

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Analysts criticized Pioneer for exceeding annual spending projections in 2018. And this year's target was higher than some had hoped, given current reserves.

Pioneer has over 40 years worth of production locked up in the Permian, according to management estimates. But at the 2017 run rate, it would take 77 years to work through the supply, wrote Jeffrey Stafford, an analyst at Morningstar.

He doubted that Pioneer would hit its goal of 1 million barrels a day because that would indicate far too much activity in the region.

"Too much Permian production has the ability to swamp global markets, weighing on commodity prices," Stafford wrote in a February report.

According to his report, Pioneer hasn't generated positive free cash flow since 2010. Last year, it spent $541 million more than it brought in.

Will things change?

After the Anadarko deal, consolidation is on everyone's mind, wrote analysts for Raymond James last week. "U.S. producers have committed to capital discipline and shareholder returns like never before," they said.